Employee Theft

1. What is Employee Theft?

Employee theft is defined as any stealing, use or misuse of an employer’s assets without permission. 1 The term employer’s assets are important because it implies that employee theft involves more than just cash. In many industries, there are much more important things than cash that employees can steal from a company. Below are some of the different assets that employees normally steal from their employers:

Money – the most common asset stolen from employers.

Time – Occurs when an employee is paid for time that he/she did not work. This usually happens through falsifying time keeping records, or when employees are not working while on the job (although difficult to prove).

All of the above items are assets to the employer that are able to be stolen. As you can see not all are tangible items and because each is unique, there are many different things to think about when trying to protect your assets. To do this though will cost time and money, two things that small business owners have in short supply. So the question becomes, “Is employee theft worth preventing?” or “will it even affect my business?” The next suggestion will show the prevalence of employee theft and how it can affect businesses.

2. Why Does Employee Theft Matter?

The U.S. Chamber of Commerce estimates that 75 percent of all employees steal at least once, and that half of these steal repeatedly.The Chamber also reports that one of every three business failures is the direct result of employee theft. According to the U.S. Department of Commerce, employee dishonesty costs American business in excess of $50 billion annually.2

Consider statistics from the American Society of Employers:

Businesses lose 20% of every dollar to employee theft.

20% of employees are aware of fraud at their companies (including theft of office items, false claims of hours worked, and inflated expense accounts).

The average time it takes for an employer to catch a fraud scheme is 18 months.

55% of perpetrators are managers.

44% of workers say their companies could do more to reduce fraud.

The U.S. Retail Industry loses $53.6 Billion a year due to employee theft.

60% of companies have staff trained to deal with fraud and ethics issues (up from 30% in 2000).

In employee surveys conducted by academics, 43% of workers admitted stealing from their companies.

The FBI reports that employee theft is the fastest growing crime in the United States.3

The U.S Chamber of Commerce estimates that theft by employees costs American companies $20 billion to $40 billion a year. To pay for it, every man and woman working in America today contributes more than $400 per year.

The chamber also reports that an employee is 15 times more likely than a nonemployee to steal from an employer. Unfortunately, 75% of employee-related crimes go unnoticed.4

3. Who Commits Employee Theft?

To understand and prevent employee theft it is important to know who is responsible for employee theft. Perhaps surprisingly, managers account for 55% of all employee theft. This may be due to the fact that they are in positions of trust and there is little to no supervision over them. While in general more employees under the age of 35 commit employee theft, the older members take much more when they do steal from the company. The reasons that employees commit theft are not fully known but Dr. Donald R. Cressey’s theory of the “fraud triangle” suggests that a combination of an employees need for money combined with an opportunity to take it from the company along with rationalization of the crime leads to fraud. A long held belief in fraud prevention companies is something called the 10-10-80 rule. This shows that 10% of employees will never steal, 10% will always steal, and 80% will go either way depending on the opportunity. The good news is that there are many things a company can do to convince the 80% that they should not steal and these will be discussed later. First it is important to know in what ways employees can steal and the methods they use.

4. Methods of Employee Theft

There are many different methods used by employees to steal from a company. Often when you mention employee theft, the first thought is of a cashier pocketing some money from the cash register or a maintenance person stealing some items from around the office. While this happens, there are many other ways that employee steal from the company. The most common types of employee theft, as reported by the National Federation of Independent Business (NFIB)5, are:

Larceny/Embezzlement

Skimming

Fraudulent Disbursements

Stealing Business Opportunities

Each type of theft is committed in a different way and will be explained in detail in the next sections.

4.1 Larceny/Embezzlement

Larceny is defined as the unlawful taking of personal property with intent to deprive the rightful owner of it permanently. This is the type of theft that involves an employee outright stealing cash or property from the employer. It is differentiated from embezzlement by the fact that embezzlement refers to theft by someone who is in a position of trust and legally allowed access to the cash or items they are stealing. An example of the difference can be seen at a restaurant. If a cook from the back were to walk by the cash register while it is open and swipes $10, if caught, he/she will be charged with larceny. If however, the cashier at the same restaurant takes the same $10 from the register, he/she will be charged with embezzlement. The difference is that the cashier was legally allowed access to the money by way of their position as a cashier while the cook had no legal access to the money under any circumstances. Both of these types of theft are characterized by the fact that they occur after money has been received by the business which is different from the next form of employee theft, skimming.6

4.2 Skimming

Skimming is another form of theft that can be cash or property, but what makes is distinct is the point in time at which it occurs. Skimming specifically refers to the removal of cash from an organization before it has been recorded and is therefore referred to as an, “off-the-books” crime. Skimming can be done by any employee that has access to incoming cash before it is recorded and this often includes salespeople, tellers, and cashiers. Going back to the previous example of the cashier at the restaurant, the cashier “embezzled” when he/she took $10 out of the cash register. If instead, the cashier were to take $10 from a customer as payment for their meal, but never record a sale took place and pocketed the money, he/she would be guilty of skimming. From a business perspective skimming can be far more impactful than larceny or embezzlement. This is because it is much harder to detect missing cash that has never been recorded. The next type of theft occurs on the books, but is often just as tough to detect.7

4.3 Fraudulent Disbursements

Fraudulent Disbursements is a term that describes employees using the companies own systems in an illegal way to benefit themselves. Fraudulent Disbursements generally look like legitimate company activity and can be broken down into 4 types of theft schemes.8

4.3.1 Check Tampering

The first type of fraudulent disbursement is check tampering. This involves employees using company checks to pay themselves. The simplest and most popular way this is done is by employees simply writing a check to themselves and depositing it in their account. Often this includes the employee forging the signature of the person authorized to write checks. Another way employees tamper with checks is by reissuing the company’s old outstanding checks but altering the payee to themselves. The company in this case has already recorded the check and deducted the cash accordingly so when the check is deposited by the employee, there isn’t any good indication that something has gone wrong.

4.3.2 Billing Schemes

Billing schemes are similar to employees who write checks to themselves. The difference is that instead of writing a personal check to themselves, they set up false vendor accounts and bill the company for nonexistent parts or services. In this way the company is voluntarily writing the check albeit to a false company.

4.3.3 Payroll Schemes

Employees can make use of payroll schemes by manipulating the amount on their check or reproducing the check somehow to cash a check more than once. Another concern for businesses is the employees who work in the payroll department. If there are no controls in place, the payroll employees can not only inflate their checks but also grant bonuses and extra vacation time. One method of theft in the payroll department involves creating a “ghost” employee on the payroll. This “ghost” doesn’t exist but the company will send checks that are collected by the “ghost’s” creator.

4.3.4 Expense Reimbursement Schemes

This type of fraud is fairly simple and if uncontrolled can be a constant problem. When an unscrupulous employee submits his/her expense report, they may include additional expenses that were either never incurred or not of a business nature, and be reimbursed for those items.

Each of the categories provided a description of different types of fraudulent disbursements. Each is unique and requires a different method of prevention and detection. For all however, the most important thing is to not rationalize discrepancies and to instead pursue them until you have found the source. The next type of theft can be easy to recognize but may not be as easy to prevent as fraudulent disbursements.

4.4 Stealing Business Opportunities

This type of theft refers not to tangible items being stolen but high value information such as customer lists, trade secrets, and self-developed business software. The most common case of this type of theft is one where an employee works at one organization in a position of privilege and then leaves to work for a competitor in a similar capacity. In this case, the employee takes with them to the competing company knowledge of customer lists, software procedures, and other pertinent business information. Once something like this happens, often the only recourse can be found in the Uniform Trade Secrets Act. This legislation is aimed at protecting trade secrets and preventing rogue employees from using them at other companies. To prove that a company in fact has a trade secret, they must first prove two things. The first is that the information in question has increased economic value that would not be realized if the information were realized to competitors. The second thing they must show is that they made a reasonable effort to protect the trade secret. If the company hasn’t taken any steps to protect the information beyond what they use to protect public records, than the courts will not allow them to claim it is a trade secret. Going to court and proving these things is not something that many business owners would like to do and it is possible to avoid. The most effective way to prevent this type of employee theft is to have every employee sign confidentiality and non-disclosure agreements.9

Above were several of the most common methods used by employees to steal from their employers. It is critical for small businesses to make sure that they maintain control over their company and prevent this type of behavior ever being part of the corporate culture. It is important to know that most employees are not inclined to steal and that 80% will only steal due to the opportunity and likelihood that they will get away with it. This temptation can also be applied to business owners and it is important to know the temptations that may arise and cause employers to illegally increase their income as well.

5. How Do You Prevent Employee Theft?

5.1.1 Problem

When discussing employee theft, the conversation often turns to a story of how someone stole this much money and then everyone is concerned with, “what did the company do to get their money back” and “what happened to the employee.” The more important question is, “how will this and other types of loss be prevented in the future?” The answer to that question depends on the type of business you are running. There are many different companies that’s sole purpose is security from employee theft. They can be hired to do this but the problem is while small businesses are often most susceptible to employee theft, they are the ones who can’t afford this type of dedicated security.

5.1.2 Solution

To reconcile this, small business owners must be very cautious how quickly they expand and add new employees. Often small businesses are started by a small few of trusted family or friends. Demand may quickly grow and there will be a need for additional employees and the impulse is to just hire people quickly so potential earnings are not lost because of insufficient capacity. When hiring in a small business one of the easiest ways to ensure good employees is to perform thorough background checks of all potential hires. The next step is to ensure that there is accountability for every position in the company and that no position has broad power to authorize things without the consent of another individual. Once this organizational structure is in place, it is important to have consistent meetings to reiterate to everyone the anti-theft policies. These meetings are supposedly to go over procedures but the real value is making employees aware that you take security seriously and to deter and fraudulent activity. Aside from this, it is important to always stay vigilant and not allow discrepancies to be attributed to simply the cost of doing business.

6. Employer Theft

While the common assumption involving theft in business pins a low level employee as the perpetrator, many cases involve a manager or owner committing the crime. Positions of power provide people with opportunities to “help themselves” with little worry of big brother looking over their shoulder. Managers are usually promoted in to such a position because they have proved to be trust worthy and capable of performing tasks on their own without supervision. Likewise, business owners rarely have anyone to oversee their actions. It is because of this that upper management can be so easily tempted to commit theft in a business. In some cases, employees know without question that their boss is committing some sort of business theft, but often lack the courage to say anything about it. Fear of losing a job is a strong deterrent to outing a manager or owner for their dishonesty.

7. Personal Accounts of Employee Theft

7.1 Time Theft-Example

This summer, I worked for the Parks and Recreation of a municipality that shall remain unnamed. To give a brief history, my title was ‘seasonal employee’ and my responsibilities were to provide help wherever it was needed. I was assigned to work on a crew in charge of maintaining the landscape and surrounding areas of the city’s two hundred acre recreational lake. My daily tasks mainly consisted of mowing, trimming, litter pick up and trash removal. I was paired to work with another employee, who I feel, was guilty of theft from the city. As defined earlier, my opinion is that he was guilty of time theft. To give an example, this particular employee would take cigarette breaks often throughout the day, at least on an hourly basis. Whenever he/she would take these unapproved breaks, he/she would stop all work, even though he/she was still on the clock. This employee would also take lunch breaks that extended past the allotted thirty minutes, as well as show up late on a regular basis. By falsely recording the hours worked rather deducting the hours spent doing leisurely activities, this employee was guilty of time theft.

7.2 Embezzlement of Materials-Example

I have also witnessed instances of higher ups being the subject of theft in a business. One such instance was at a country club. The assistant head pros at this particular club constantly helped themselves to food and beer behind the bar during work hours. More often than not, they were taking beer and would even hand them out to friends in the evenings. These were never paid for and ultimately had great affect on how badly the club did and how many managers were cycled through the club as a result.

7.3 Skimming-Example

Another instance where a manager was involved in theft was one that had an effect both on the company and a customer. A customer paid in full for specific products, some of which had to be ordered. The manager took the money, promising that the products would be ordered and delivered. He then proceeded to use the money for other purposes before ordering the customer’s products. This would mean that the customer would not be getting their product in a timely manner, if at all. Furthermore, it meant that the company would have to come up with money to make the order from another source, putting the company and its employees out of money.

7.4 Time Theft-Example

I have witnessed employees stealing hours from a business. With a business that uses a form of clocking in or time card method for keeping track of hours, there must be a secondary method for when employees forget to clock in or have technical difficulties doing so. Many businesses use a log in which employees manually write down there time of arrival in such a situation. I have personally seen instances where employees would exploit this by intentionally no clocking in only to go write a time in the log earlier than their actual arrival, those adding paid hours to their paycheck that they did not actually work for.

7.5 Tax Evasion-Example

A final experience involved tax evasion at a business. The owner was taking out taxes from employee paychecks. However, not all employee checks were done correctly. In addition, the company was not paying payroll taxes for several years. This, of course, gave the illusion on paper that the company was doing very well when, in fact, it was thousands and thousands of dollars behind in taxes. When audited, the company’s entire bank account was cleared out. This not only took the owner’s money, but also money that was owed to employees and lenders.

8. Personal Interview

The following information is a mix of information gathered via an interview with the president of a security consulting company based in Houston, Texas who has personal experience covering close to 700 cases and secondary information obtained from various sources online.

When small businesses are first starting up, their focus on growing their business consumes cultivating a strong financial foundation. This typically includes what it takes to put in controls or the checks and balances within the business.

8.1 Thought Experiment

MOM & POP Store – the two of them put 100% trust in each other (ok maybe not 100%, but it is in the 90%+ range). As their business grows they have more business than they can process alone, so they bring on board a book keeper or accountant and maybe a store manager to maintain inventory. It is this blind delegation to these individuals and their new positions that opens the gateway to a host of security vulnerabilities. Many of these security holes are not realized before it is too late due to the initial blanket of trust they originally started out with.

“People want to inherently trust each other.”

-Pat

What to do: Conduct a background check. A background check can be the cheapest solution in security because it is so simple to do.

How to do it: Calling their references. Pat makes sure to mention here that there is no requirement of the reference to divulge any information such as past theft history of an individual, however When calling a reference you can often, “read in-between the lines during that call” as to the character of that individual.

Accounting for times of unemployment

What to do: Confirm dates of employment

Why to do it: If they’ve been in jail they often attempt to stretch the times of their job history to cover it up.

Be clear on job positions

How to do it: Produce a good job description (could be three lines for a small business just starting out, but it is better than nothing!)

General tip to deterring theft in a business: Think like a thief

Keeper of the Books can absolutely kill a business

How it happens: They have access to the financial records of a business

“The keepers of the keys to the castle”

-Pat

EXAMPLE

8.2 Article read by Pat

Over one million dollars was lost due to an unscrupulous bookkeeper!

The bookkeeper’s Method? This lady was so ornery when around fellow coworkers that no one wanted to deal with her. This was her mechanism for keeping a safety bubble around her while she scammed the business.

A CPA is not trained in the methodology of theft.

He is your tax returns guy but not your’ deterrent of financial theft.

The periodic review of records does not equate to a security check on those records.

8.2.1 Problem:

Keeper of burglary alarm codes and keeper of keys to the building are individuals to consider. Often times those are the same people in a small business. Consider that if the alarm goes off you typically need someone to go and get in to the building to turn it off. If that person turns out to be dishonest they have a method of simply entering after hours and shutting off the same alarms designed to catch them!

8.2.2 Solution:

Often security alarm companies have in place systems that create a report for each unreasonable entry into the company facilities after hours. Pat emphasizes that such cases are “a very frequent occurrence” for small businesses and is simple to reconcile in advance with the proper knowledge of these reports. The knowledge of where these reports reside and what to look for within them is an invaluable asset to the security of any small business.

Investigating a spike in Inventory dollars

EXAMPLE:

“You open a taco stand and all of a sudden the expense of hamburger meat is out of sync with the amount of sales. Is it spoilage, too much meat in the tacos, someone not charging for tacos, or someone taking home a bunch of hamburger. It could also be a innocent as someone over ordering and it’s all sitting in the cooler too.”

-Pat

Tracking each individual line item of inventory is a deterrent of theft.